Business income is reported on either the accrual or cash basis. If you have more than one business, you may have a different accounting method for each business. Most individuals and many small businesses use the cash method of accounting.
Generally, corporations and partnerships with a corporation as a partner cannot use the cash method. However, a corporation or partnership, that meets the gross receipts test, can generally use the cash method. A corporation or a partnership meets the test if its average annual gross receipts for the 3 prior tax years were $26 million or less (indexed for inflation).
Under an accrual method of accounting, income is reported in the year it is earned and expenses are deducted or capitalized in the year incurred. The purpose of an accrual method of accounting is to match income and expenses in the correct year.
Business activities may be subject to personal income tax or corporate income tax.
The following businesses formed after 1996 are taxed as corporations.
• A business formed under a federal or state law that refers to it as a corporation, body corporate, or body politic.
• A business formed under a state law that refers to it as a joint-stock company or joint-stock association. • An insurance company.
• Certain banks.
• A business wholly owned by a state or local government.
• A business specifically required to be taxed as a corporation by the Internal Revenue Code
• Certain foreign businesses.
• Any other business that elects to be taxed as a corporation.
Individuals and partnerships may be subject to personal income tax.
A domestic corporation is created or organized in the United States or under the law of the United States or of any State.
Regarding the tax residency for Individuals and partnerships please refer to the Income Tax Guide.
Domestic corporations are subject to unlimited corporate income tax liability.
Foreign corporations have limited tax liability in the United States. Income of foreign corporations not connected with United States business is taxed at 30% of the amount received from sources within the United States. Income from trade or business within the United States during the taxable year is taxable like domestic income.
Business activities of individuals and partnerships are taxed as income derived from business. In case of self-employment income, self-employment tax could apply, which goes to financing social security and medicare benefits.
Federal Tax Rates
Corporate income tax is 21% of taxable income.
Regarding income tax rates, please see our income tax guide.
Most states levy additional corporate income tax. The top corporate tax rates in the individual states go up to about 10%.
Corporate Income Tax Schedule
Generally, a corporation must file its income tax return by the 15th day of the 4th month after the end of its tax year.
Sales tax is levied on the sale or lease of goods and services. There is no federal sales tax in the USA. Individual states have different regulations regarding local sales taxes.
Real Estate Transfer Tax
Real estate transfer tax is a tax that is imposed on the privilege of transferring real property within the jurisdiction. There is no federal real estate transfer tax in the USA. Individual states have different regulations regarding local real estate transfer taxes.